Nigeria Mergers & Acquisition 2020: Deal Activity, Legal Trends and 2021 Outlook (Part II)
Structuring an M&A Deal in a Pandemic
Companies and their advisers used various deal structures to execute M&A deals in 2020. These structures included schemes of arrangement and merger, acquisition of majority and minority equity, controlled auction process and series/seed funding.
Majority of the M&A deals executed in 2020 were executed through the acquisition route as investors purchased majority and minority equity stake in target companies in outright acquisitions or equity investments. Transactions such as the acquisitions of Paystack, Peugeot, FBN Insurance, UPDC and the Transnational Bank (Kenya) Plc were executed through the acquisition route. Equity investments in the startup space were mostly structured as series and seed funding rounds led by foreign venture capital and private equity firms.
The scheme of arrangement route remained a popular business combination structure prior to the introduction of merger provisions in the Companies and Allied Matters Act 2020 (CAMA 2020). For instance, the merger of Dangote Sugar and Savanah Sugar was executed through the scheme of arrangement provisions in section 539 of the now repealed Companies and Allied Matters Act, 1990. The scheme of arrangement structure was also used for other restructuring transactions such as the demutualisation of The Nigerian Stock Exchange.
The Covid-19 pandemic and the consequent lockdowns and restriction of movement impacted deal structuring as advisers devised mechanisms to handle negotiations, valuation, and due diligence in a remote work environment. Introductory calls and transaction meetings were moved to virtual platforms such as Zoom and Microsoft Teams, as executives and advisers in most companies implemented remote working policies. Due diligence work was conducted virtually as data from target companies were uploaded into virtual data rooms and other cloud storage platforms. Site visits were managed as virtual tours and in cases where a physical tour was necessary, visits were held according to Covid-19 protocols to ensure the safety of facility workers and the visitors.
The market volatility caused by the Covid-19 pandemic also affected valuation and structuring of purchase price as buyers and sellers struggled to align on valuation of target companies. The uncertainty caused by the pandemic made buyers wary of the post-pandemic financial situations of target companies. To address this concern, buyers insisted on various forms of contingent consideration and purchase price adjustments such as the earnout mechanism. Where the payment of the purchase price is structured using the earnout mechanism, a portion or all of the purchase price would be paid contingent upon the target company achieving predefined financial and/or operating milestones post transaction-close.
Regulatory Changes in the M&A Space in 2020
The CAMA 2020 introduced significant changes to the M&A landscape as additional provisions governing schemes of arrangements and mergers, acquisitions and divestitures were introduced.
The scheme of merger provisions in section 711 of the CAMA 2020 fills the lacuna created by the repeal of the merger provisions in sections 118-128 of the Investments and Securities Act by the provisions of the Federal Competition and Consumer Protection Act (FCCP Act). With the re-introduction of merger provisions in the CAMA 2020, companies can now merge through a scheme of merger instead of the dual scheme of arrangement structure popularly used in 2019. The CAMA 2020 also introduced and revised provisions in relation to (i) pre-emptive rights of shareholders (right of first offer and refusal); (ii) share buyback/repurchase; (iii) financial assistance to shareholders; and (iv) offer to dissenting shareholders.
The Finance Act 2019, a tax legislation which took effect from January 2020 changed the tax landscape for corporate reorganisations through amendments to various tax laws. Notably, the Finance Act introduced a “minimum holding period” rule which exempts assets transferred or sold during a corporate reorganization between related parties from companies income, valued added and capital gains taxes, provided that the Nigerian companies must have been members of a recognized group of companies for a consecutive period of at least 365 days prior to the date of the reorganization. The acquiring company must also not dispose of the assets acquired within the succeeding 365 days after the date of the transaction.
In November 2020, the Federal Competition and Consumer Protection Commission (FCCPC) published new Merger Review Regulations, Merger Review Guidelines, and several ancillary instruments, and withdrew the existing guidelines for notification of foreign-to-foreign mergers with a Nigerian component. The Merger Review Regulations were issued pursuant to the FCCPC Act and provides more clarity on regulated areas such as (i) determinants of control; (ii) application of merger control laws to foreign mergers; (iii) triggers for merger review; and (iv) merger review period.
Outlook for 2021
Significant M&A deal activity was recorded in 2020 notwithstanding the effects of the Covid-19 pandemic and fall in crude oil prices on the Nigerian economy. The contracting GDP, rising inflation and devaluation of the Naira did not also halt M&A activity in the Nigerian business environment.
M&A deal activity in 2021 is expected to track the recovery of the Nigerian economy and other macro-economic factors. Real GDP growth in Nigeria’s economy is projected to rise to 3.3%, according to data from the African Development Bank (AfDB). However, much would depend on factors such as the management of the Covid-19 pandemic, stabilisation of the Naira, increased economic activities, FDI and a clearer economic outlook for investors.